International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

11
THE EFFECT OF THE INTERNATIONAL DEBT CRISIS ON U.S. BANK EQUITY RETURNS

JOHN GLASCOCK, IMRE KARAFIATH, AND ROBERT W. STRAND


INTRODUCTION

In retrospect, U.S. investors should not have been surprised in the early 1980s when large commercial banks rescheduled an unusual volume of loans that had been made to developing nations. The conditions that led to the reschedulings (high interest rates, worldwide recession, and falling commodity prices) were felt universally. The international debt crisis has received widespread attention in both the financial and popular press; questions have been raised whether a series of international defaults could lead to a 1930s-style collapse of the banking system. The purpose of this chapter is to shed light on this issue by investigating bank stock price reactions to information on five major defaults and reschedulings: Argentina, Mexico, Venezuela, Brazil, and Chile.

Intervention analysis is used to determine whether information regarding international lending had industrywide and intra-industry effects on bank stock prices. The key issue is whether investors could have identified the individual banks that had overextended their international lending to specific countries. Prior to 1983, the Securities and Exchange Commission (SEC) did not require banks to reveal the composition of their international loan portfolios. 1 Nonetheless, investors were able to use reliable and publicly available information from organizations such as Salomon Brothers to place banks within broad categories, such as multinational, regional wholesale, and regional consumer. The central issue is whether international defaults affect all bank stock returns, including those of the regional consumer and wholesale banks, which may not have been expected to be heavy international lenders.

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